The stockpiling of household goods, regular grocery shopping, and other necessity purchases predominantly driven by the coronavirus outbreak, has inevitably impacted other industries indirectly. From elbow bumps, to video conferencing, to food delivery, the COVID-19 pandemic has changed how society views close contact.
The payments industry is no exception. As the catastrophic human costs of the coronavirus come into clearer focus, contactless payments including online payments is expected to surge. These fast-emerging digital payment methods, together with the companies providing such service, have become the main intermediaries between consumers and retailers of all sorts.
The truth is that the ongoing COVID-19 pandemic and the expected recession are reshaping the way business is done and the way payments are being implemented. Across number of industries, merchants are currently struggling with the sudden and steep decline in business, requiring them to pivot, at a moment’s notice, towards new business models that reach customers literally at their doorstep.
As contactless payments are becoming the norm in this torrid environment, and as consumers become hesitant to carry and handle cash, companies need processing partners who can serve merchants’ changing needs, even across industries that are currently being decimated, such as travel, hospitality and restaurants.
It is interesting to note that RS2 Software plc (RS2), being a local listed company is engaged in the provision of acquiring and processing services to a wide range of customers including large financial institutions, integrated software vendors (ISVs), payment facilitators (PayFacs), independent sales organisations (ISOs), and merchants across the globe. We are of the view that the group is uniquely positioned to assist such companies make the necessary changes to survive this pandemic, and even thrive in a post-COVID-19 world.
Given that RS2 operates in multiple jurisdictions, it is important to keep in mind that the group is subject to multiple COVID-19 scenarios. However, through the publication of their latest financial results (FY19) earlier this week, the group confirmed that although an adverse effect on the group’s FY20 results is expected, RS2’s diversified business profile will however prove to be beneficial in mitigating such impact.
The group confirmed that all business lines, including licensing, processing and merchant services around the globe are operating at normal services level. RS2’s licensing business is a stable business with a large portion of revenue derived from this segment already being contracted. Contrarily, the processing division is anticipated to decline during the current year as new businesses, even though contracted, are not expected to be ramping-up as planned due to the COVID-19 outbreak. Nevertheless, the group also sustained that while some projects are being delayed, RS2 still expects to grow its revenues in comparison to FY19.
As per latest results, the group recognised revenues amounting to €22.1m, representing an increase of circa 14 per cent when compared to an adjusted revenue figure (excluding the impact of IFRS15) of €19.4m in FY18. Processing revenue increased by 129 per cent during FY19, reflecting additional revenue derived from new and existing clients in the form of implementation and transaction processing fees. It is worth mentioning however, that pursuant with RS2’s continuous investment in the US, RS2 generated €4.3m in revenues from their US operation during FY19, signifying an important milestone for the group.
Operating and administrative expenses increased by 20 per cent and 42 per cent respectively during FY19, mainly reflecting the strengthening of the administrative functions at the group’s head office, the United States and Germany in support of the planned international growth.
The group’s investment in headcount and infrastructure was also intensified during FY19, in order to be able to deliver the current load and to meet the demand in the pipeline. Notwithstanding the coronavirus pandemic, RS2 currently has an exciting project pipeline in place, whereby the group provided specific timeframes as to when several clients within different regions are expected to go live during the current financial year.
In terms of RS2’s US operation, two clients are expected to go live in the second quarter of 2020 and at least three more clients, of which one is significant, are also anticipated to go live in quarter three of 2020.
RS2 also explained that the group has also been gearing to on-board into live production one of the largest financial institutions in Australia and New Zealand in the second quarter of 2020. The group is further preparing to launch the services with its Alliance partner for the travel industry in quarter two of this year, starting with Europe and following up in Latin America (LATAM) and the rest of the world.
It is also crucial to point out that prior the publication of the FY19 results, RS2 continued reaping the benefits implemented in prior years and achieved two important milestones during the first quarter of FY20. The first being an acquisition of a commercial network operator for electronic, card-based payment systems in Germany and the second relates to a partnership agreement entered into with MoviiRed based in Colombia. Both milestones are expected to boost the group’s acquiring business segment moving forward.
We believe that the above-mentioned updates regarding the group’s project pipeline should bring additional comfort for investors in terms of RS2’s unique business model and their expansion strategy.
The group maintained that they will also be seeking to pursue various opportunities to develop and further grow their business through joint ventures, partnerships and direct acquisition. As such, we also believe that those investors who have capitalised on the recent sharp decline in RS2’s share price will be further rewarded in the longer term.
Disclaimer: This article was issued by Andrew Fenech, research analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.